NEW YORK — Two Bear Stearns executives who ran hedge funds that collapsed after betting heavily on the shaky subprime mortgage market were acquitted Tuesday of lying to investors — a defeat in the government's bid to punish fraud exposed by the financial crisis.

A jury in federal court in Brooklyn deliberated about eight hours over two days before finding Ralph Cioffi and Matthew Tannin not guilty of conspiracy and other charges in an alleged scheme that cost 300 investors about $1.6 billion and nearly caused the demise of Bear Stearns itself. The firm avoided bankruptcy in a rescue buyout by JPMorgan Chase & Co.

Both men had been charged with three counts of securities fraud and two counts of wire fraud. Cioffi was also charged with insider trading.

After the verdict, some jurors told reporters that they concluded the evidence against Cioffi and Tannin was flimsy and contradictory. Other suggested the pair were being blamed for market forces beyond their control.

"How much can two men do?" said Aram Hong.

Said Serphaine Stimpson: "They were scapegoats for Wall Street."

Tannin left the courtroom without comment. His attorney, Susan Brune, said, "We are thrilled for Matt and for his family." Cioffi said only, "I'm happy."

In a statement, U.S. Attorney Benton Campbell said, "We are disappointed by the outcome in this case, but the jurors have spoken and we accept their verdict."

During a monthlong trial, prosecutors relied on a series of e-mails they alleged revealed behind-the-scenes alarm at the hedge funds as investments in complex, high-risk securities tied to the subprime market began to slide.

"The subprime market looks pretty damn ugly," Tannin wrote to Cioffi in April 2007. If Bear's internal reports were accurate, Tannin suggested, "I think we should close the funds now," and "the entire subprime market is toast."

The situation became so dire that Cioffi pulled $2 million of his own cash from the fund, but the pair still told investors that they should stay in and that the outlook was good, prosecutors said. He also was accused of hiding news that one worried investor had decided to pull out $57 million from the funds.

Based on a credit analysis, "there's no basis for thinking this is one big disaster," Cioffi told investors in a recorded conference call with investors that was played for jurors.

The defendants "lied to their investors. They defrauded their investors. The misled their investors," prosecutor James McGovern said in his closing argument. "And it's time for them to be held accountable."

Defense attorneys sought to convince the jury that the e-mails were taken out of context. Cioffi and Tannin, they said, had no motive to steer investors off a cliff, and were honest with them about the volatility of the market.

Prosecutors failed to show that the managers "knew what the future held and they hatched a criminal scheme to lie to investors," Brune said in closing arguments.

Added Brune: "This is a case that is built on hindsight bias."

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